Singapore's GIC says it kept risk on a short leash as markets ran wild

GIC, the Singapore sovereign wealth fund with a mandate to "preserve and enhance" the purchasing power of an estimated $690 billion in government reserves, has been focusing more on preservation than enhancement in recent years.

The annual report GIC released in July showed the fund maintaining a far more conservative asset mix than its policy portfolio calls for and little in the way of alpha — vs. the passive reference portfolio the fund uses to determine the government's risk appetite — for the 20 years through March 31, GIC's preferred gauge of long-term performance.

As of March 31, the fund's allocations to developed markets equity stood at 14% of its portfolio, 6 percentage points below its policy target range of 20% to 30%. Nominal bonds and cash, at 37%, were 7 points above their 25%-to-30% range.

Elsewhere, allocations to emerging market equities at 16%, real estate at 10% and inflation-linked bonds at 6% were within their respective target ranges. Private equity, at 17%, was the only other asset segment to exceed its range of 11% to 15%.

The fund, meanwhile, reported nominal annualized returns of 7% for the 20-year span, just matching those of its 65% global equities/35% global bonds reference portfolio.

For the five- and 10-year periods through March 31, GIC's respective annualized gains of 7.7% and 6.4% trailed its reference portfolio returns of 8.5% and 7.3%.

Those results suggest that over the past two decades any investor with access to passive global equity and bond exposures could have matched the returns of an institutional powerhouse fielding 1,900 employees in 11 financial centers around the globe.

That, some analysts say, could simply reflect the fact that the period in question may prove to have been an unusually advantageous one for passive investing, making GIC's failure to best its reference portfolio less meaningful.

"At the dawn of quantitative easing in 2009, not many investors knew the extent to which it would distort market values, dampen volatility and favor passive investing," noted Amin Rajan, CEO of CREATE-Research, a London-based research house focused on strategic change in the global investment management industry.

For GIC, launched 41 years ago on the then-novel premise that government reserves should be put to work in capital markets to enhance their value, this wasn't the first instance when returns failed to exceed a classic 60% equity/40% bond benchmark portfolio. But annual reports tied earlier shortfalls to a cautious investment stance over the fund's initial two decades.

For example, until GIC's first major review of its investment approach led to the adoption in 2002 of an endowment style of investing, the fund maintained a "decidedly conservative" asset allocation mix of 30% equities, 40% bonds and 30% cash through the end of the 1990s, GIC's annual report for its fiscal year ended March 31, 2013 noted.

A second major review led to the adoption in 2013 of what's come to be known as a total portfolio approach — a flexible, dynamic approach where new investment opportunities compete for capital with existing portfolio allocations as opposed to staying within more rigid strategic asset allocation targets for different market segments. With GIC's rolling 20-year investment returns at the dawn of that era still inclusive of several years of 30% cash allocations, the fund's nominal returns lagged those of its newly introduced reference portfolio by between 30 and 80 basis points for the five years through March 31, 2017.

As the impact of those heavy cash allocations gradually rolled out of the fund's 20-year returns over the past decade, GIC's portfolio began to outpace its reference portfolio, by 20 basis points for the two decades ended March 2018, 30 basis points the following year and 40 basis points for the period ended March 31, 2020.

A GIC spokeswoman said CEO Lim Chow Kiat, Group Chief Investment Officer Jeffrey Jaensubhakij or Head of Total Portfolio Strategy Chiam Swee Chiang weren't available to comment.

But in an emailed response to questions about the absence of alpha for the latest 20-year period, the spokeswoman suggested GIC had dialed down risk in an environment of heightened capital market valuations.

"Given high valuations, weakening fundamentals, and rising market uncertainty, GIC reduced risk-taking before 2020 in markets that were assessed to be overvalued," a posture that continued into the fiscal year ended March 31, she said.

The last time GIC's developed markets equity allocations were close to the top of their policy range was the fiscal year ended March 31, 2017, when they accounted for 27% of the portfolio. Since then, they've dropped steadily, to 19% as of March 31, 2019, and 14% for the latest fiscal year.

Allocations to nominal bonds and cash, meanwhile, have topped their 25%-to-30% range since the fiscal year ended March 31, 2014, when they climbed to 31% of the portfolio from 29% the year before. Allocations peaked subsequently at 44% of the portfolio as of March 31, 2020 before falling back to 37% for the latest fiscal year.

Private equity and real estate have been the primary recipients of money moving out of equities and more recently bonds as well, with deal activity on the back of strategic partnerships GIC has forged with industry players continuing at a frenetic pace.

GIC's Sept. 23 announcement that it will become the lead shareholder in Mediterranean beach resort operator Sani/Ikos Group was the latest in a recent flurry of real estate and private equity investments.

Between May and June, the sovereign wealth fund joined forces with Charleston, S.C.-based Greystar Real Estate Partners LLC and Heerlen, Netherlands-based Stichting Pensioenfonds ABP's APG Asset Management arm on two separate investments in student housing; teamed up with OMERS Infrastructure and Wren House Infrastructure Management Ltd. in late June to acquire chassis lessor Direct ChassisLink Inc. and joined forces in August with private equity giant Carlyle Group Inc. on a strategic investment in Eneus Energy Ltd. to support the development of a green ammonia project.

GIC's allocations to private equity have jumped over the past three years to 17% from 12% of its portfolio, pushing above its policy target of 11% to 15%, while real estate, up to 10% from 7%, remains within its 9%-to-13% target range.

That higher profile for private markets allocations in recent years left the portfolio's volatility over the past two decades at 8.7%, well below the reference portfolio's 10.8% mark, according to GIC's annual report. Over that 20-year period, the GIC portfolio saw a similar return as its reference portfolio with much lower risk, the spokeswoman said.

"This reflects the value of our long-term investment approach and mandate, which is to first protect and then grow the reserves under our management," she said.

When GIC announced the "major review" of its investment process that led in 2013 to its adoption of a total portfolio approach, achieving market-topping returns seemed to get at least equal billing with preserving the value of the reserves the government entrusted to the fund.

In an overview of the fiscal year ended March 31, 2013, Group President Lim Siong Guan and Lim Chow Kiat, (then) group CIO, wrote, "GIC seeks to achieve better long-term returns than the reference portfolio through its asset allocation strategies."

An outline of the fund's new approach in that year's annual report reiterated the goal, stating that "within the risk tolerance limits defined by the Reference Portfolio, GIC aims to achieve better long-term returns than can be attained through investing passively i.e. 'beta' returns."

A November 2020 report by Willis Tower Watson PLC's Thinking Ahead Institute, based on a survey of 18 other early total portfolio approach adopters, including GIC, found half of that sample expecting portfolios to yield an investment advantage of 50 basis points or more a year.

"The total portfolio approach is more dynamic (and) as part of its design, rotations in the market cycle can be exploited to add value," noted Marisa Hall, London-based co-head of the Thinking Ahead Institute and an author of the November 2020 report, in an email. A traditional strategic asset allocation approach "is often more anchored, where the risk profile is reflected in a set asset allocation," even if asset class ranges offer some flexibility, she said.

The GIC spokeswoman said in her email that the fund's reference portfolio is not a performance benchmark. While representing the risk the government is prepared for GIC to take in generating good long-term investment returns, that level of risk isn't meant to be held constant through market cycles, she suggested.

"On occasions when GIC is more risk averse than the risk profile of the Reference Portfolio, such as when market exuberance leads to heightened valuations, GIC may lower our risk exposure," the spokeswoman said. "Conversely, GIC may increase our risk exposure when the opportunity arises," she added.

The Thinking Ahead Institute's Ms. Hall demurred on the question of whether such changes in portfolio risk should be seen as market timing. "We would probably class this as somewhere in between strategic and tactical," she said.

Some of the other Asia-Pacific asset owners surveyed by the Thinking Ahead Institute, including Australia's A$194.4 billion ($130.6 billion) Future Fund, Melbourne, and the NZ$58.4 billion ($35 billion) New Zealand Superannuation Fund, Auckland, likewise adjust their risk profiles in response to market conditions.

Both of those funds, launched less than 20 years ago, report outpacing their performance benchmarks since inception, by an annualized 1.47 percentage points for New Zealand Super and 1 percentage point since May 2006 for the Future Fund.